"It is about taking responsibility for what we are doing to our planet,'' Senator Wong said. "It is about taking responsibility and preparing for the future.

"We confront a daunting reality: we cannot continue to pour carbon pollution into the atmosphere as if there is no cost.''

Senator Wong said the government believed the Australian economy was now well-positioned to cope with a reform as significant as the start of an emissions trading scheme.

"The tough economic reforms of the past - opening up the economy and floating the dollar - mean Australia is now well placed to undertake this tough new reform.''

The so-called Green Paper reveals plans to cut the excise on fuel on a cent-by-cent basis to shield drivers from the effect of higher petrol prices after Cabinet agreed there should be not a ''net increase'' for motorists.

The excise cut will be a floating measure that counters the retail cost at the bowser as the result of the trading scheme. The move may cost the government as much as $1 billion and the reduction will be fixed for three years.

The government's paper has estimated, based on preliminary economic modelling, that a carbon price of $20 a tonne would add 0.9 percentage points to Australia's inflation rate.

The inflation spike is expected to be a once-off and will depend on the carbon price which will be set by the market when the permits are auctioned.

"This effect takes account of the government's decision to offset the impact on the price of fuel early in the scheme,'' the paper said.

"It is likely that the impact on the CPI from the introduction of the scheme will be largely a one-off. It is not a 0.9 (percentage point increase) each year.''

The government is still deciding on the number of permits it will create, and it is likely permit auctions will take place four times a year.

The paper shows the government is keen to reduce reliance on traditional fuel sources, despite the move to trim the excise - a policy that ignores the advice delivered by adviser and eminent economist Ross Garnaut.

"Motorists have tended to see high prices as a temporary event that does not require lasting changes in behaviour, including in their choice of motor vehicles,'' the paper said.

The government has admitted the cost of electricity and energy will rise, but has outlined plans to deliver direct tax cuts and bolster welfare payments to ease the burden of Australian households.

The exact details of the household assistance will be set out in the government's white paper which is due to be published by the end of the year. The next step in the process will be Professor Garnaut's second report next month and then detailed Treasury modelling by September.

Treasury estimates are expected to recommend the government raise family benefit payments to help households cope with the price increases.

There will be increased direct payments, above the usual inflation adjustments, to pensioners, carers and seniors. The groups led criticism of government's first Budget in May, arguing they had been missed out on benefits doled out to other groups.

The review into the Australian taxation system led by Treasury Secretary Ken Henry has been directed to examine the current arrangements between tax and the welfare system.

The increased welfare payments could be coupled with income tax cuts for those earning under $100,000 a year. Economists have calculated a carbon price of $30 a tonne would deliver the government $13 billion a year in revenue.

"Every cent raised by the scheme will be used to help households and business adjust,' the paper said.

"The revenue raised allow the government to assist households - particularly low-income households - and business adjust to the impact of the scheme.''

The government appears keen to press ahead with its tight timetable to have the scheme operating by 2010, despite critics saying the start date was too soon.

Labor has buckled to the nation's farmers, though, and a decision whether to include agriculture in the scheme has been delayed until 2013. If the go-ahead is granted, the agriculture will be counted by 2015.

The burden of the trading scheme will be carried by Australia's corporate entities, as the government estimates that only 1000 businesses will breach the emission caps of 25,000 tonnes of carbon a year.

To protect those businesses which compete internationally and to stop companies moving offshore, the government will provide incentives via free permits to reduce costs.

The government will also establish the Electricity Sector Adjustment Scheme to assist energy generators, particularly those which operate coal-fired power station.

The paper said producers needed to reduce emissions and the government would give funding for carbon sequestration, despite Treasury urgings that the scheme was largely untested.
smurdoch@fairfax.com.au